Policy Recommendations to

Secure Balanced and

Sustainable Growth in Asia

October 2010

Asian Policy Forum

Supported by Asian Development Bank Institute
To Asian Leaders:

Policy Recommendations to
Secure Balanced and Sustainable Growth in Asia
The global economy is now recovering from the global financial crisis, and Asian
economies have been leading the recovery, thanks to strong economic fundamentals
and aggressive monetary and fiscal stimulus measures. Nevertheless, in light of the
weak recoveries in the United States (US) and Europe, a sustainable recovery does
not yet look assured. New concerns have arisen, including the sovereign debt crisis
in southern Europe, lingering worries about a double-dip recession in the developed
economies, uncertainties about the appropriate timing of the withdrawal of monetary
and fiscal stimulus programs around the world, renewed large short-term capital
inflows to emerging economies, currency appreciation pressures and “currency
wars.” Asian leaders urgently need to formulate and implement economic and
financial policies to offset these risks, and to secure sustainable long-term growth
that is socially inclusive and environmentally friendly. Progress in these areas can be
achieved in both global forums, especially G20, and in regional forums such as the
ASEAN+3, East Asia Summit and APEC processes. The undersigned have
developed and support the broad thrust of the policy recommendations presented in
this document. In principle, the recommendations are intended for Asian economies;
although, in some cases, they may only be relevant to the ASEAN and/or ASEAN+3
economies. Through the Asian Policy Forum, an entity supported by the Asian
Development Bank Institute (ADBI), ADBI has facilitated the development and
compilation of these recommendations, including organizing workshops and
conferences to discuss the recommendations, soliciting individual contributions, and
updating with recent developments. However, this document reflects the individual
opinions of the signatories, and should not be construed as the official position of
either the institutions they represent, the Asian Development Bank or the ADBI.
Furthermore, the individual authors retain some differences of view on the details,
while joining to recommend decisive action by leaders.
Signatories
Mohamed Ariff, Malaysian Institute of Economic Research, Malaysia
Chatib Basri, Institute for Economic and Social Research, Department of Economics
University of Indonesia, Indonesia
Siow Yue Chia, Singapore Institute of International Affairs, Singapore
Hwee Kwan Chow, School of Economics, Singapore Management University
Biswajit Dhar, Research and Information System for Developing Countries (RIS),
India
Gang Fan, China Center for International Economic Exchange, People’s Republic of
China
Shin-ichi Fukuda, Tokyo University, Japan
Stephen Grenville, Lowy Institute for International Policy, Australia
Cielito Habito, Ateneo de Manila University, Philippines
Gary Hawke, New Zealand Institute of Economic Research, New Zealand
Yiping Huang, China Center for Economic Research, Peking University, People’s
Republic of China
Sisira Jayasuriya, La Trobe University, Australia
Masahiro Kawai, Asian Development Bank Institute, Japan
Yong-Duk Kim, Korea University, Republic of Korea
Rajiv Kumar, The Federation of Indian Chambers of Commerce and Industry, India
Jong-Wha Lee, Korea University, Republic of Korea
Hank Lim, Singapore Institute of International Affairs, Singapore
Peter McCawley, College of Asia and the Pacific, Australian National University,
Australia
Yung Chul Park, Korea University, Republic of Korea
Djisman Simanjuntak, Centre for Strategic and International Studies (CSIS),
Indonesia
Hong Song, World Trade Section, Institute of World Economics and Politics, Chinese
Academy of Social Sciences, People’s Republic of China
Larry Strange, Cambodia Development Resource Institute, Cambodia
Chalongphob Sussangkarn, Thailand Development Research Institute, Thailand
Shinji Takagi, Osaka University, Japan
Khee Giap Tan, Lee Kuan Yew School of Public Policy, National University of
Singapore, Singapore
Musleh ud Din, Pakistan Institute of Development Economics (PIDE), Pakistan
Tri Thanh Vo, Central Institute for Economic Management (CIEM), Viet Nam
Yuqing Xing, National Graduate Institute for Policy Studies, Japan
Doo Yong Yang, Kyung Hee University, Republic of Korea
Josef T. Yap, Philippine Institute for Development Studies, Philippines
Yongding Yu, Institute of World Economics and Politics, Chinese Academy of Social
Sciences, People’s Republic of China
Mahani Zainal Abidin, Institute of Strategic and International Studies, Malaysia
Jianping Zhang, Institute for International Economic Research, National Development
and Reform Commission, People’s Republic of China
Yunling Zhang, Institute of Asia-Pacific Studies and Institute of Japanese Studies,
Chinese Academy of Social Sciences, People’s Republic of China

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 Policy Recommendations to
Secure Balanced and Sustainable Growth in Asia

Executive Summary
Introduction. This paper summarizes our recommendations for economic and
financial policies of Asian economies to offset various risks to the durability of the
current economic recovery, and to secure sustainable long-term growth that is
socially inclusive and environmentally friendly. The rise of the Group of Twenty (G20)
as the premier forum for global economic policy coordination has also given Asia an
increased opportunity to play a more important role to effect change in the global
economic and financial architecture and to promote economic rebalancing, while
Asia’s successful economic recovery program has given it unprecedented
prominence. In addition to a stronger Asian voice in world forums, we believe that
strengthening and developing institutions for regional cooperation can make a
significant contribution to achieving these goals. These include the ASEAN+3, East
Asia Summit (EAS), and APEC processes.

The Role of Asian Regional Bodies in Global Macroeconomic and Financial

Management.
 Address the following areas: timing and pace of exits from macroeconomic stimulus
policies; the need to avoid competitive currency devaluations; the need to
implement financial safety nets; and reforms of international financial institutions
(IFIs);
 Form a caucus to develop common Asian positions on some important issues;
 Hold the ASEAN, ASEAN+3, and EAS meetings, as well as the South Asian
Association for Regional Cooperation (SAARC) meeting, before the G20 meetings
to institutionalize communication between G20 members and non-members; and
 Involve regional development banks in the G20 process to help non-G20
developing countries to respond to the global financial crisis and achieve inclusive
and sustainable development.

Policies for Reducing the Global Current Account Imbalance.

 Pursue both economic structural reforms that can expand regional trade and final
demand and real exchange rate adjustment;
 Develop stronger regional and global financial safety nets to reduce the need to
accumulate foreign exchange reserves; and
 Promote greater use of Asian currencies to reduce dependence on the US dollar.

Policies for Inclusive and Green Growth.

 Increase the share of labor income in GDP in some countries to improve
inclusiveness and raise consumer spending;
 Implement labor market reforms to increase employment growth during economic
upturns;
 Improve the coverage and quality of social protection to reduce vulnerabilities
among the poor and low-income people and support increased consumer spending
by reducing the precautionary demand for savings;
 Promote the use of market-based mechanisms to enable firms and households to
internalize social environmental costs and to encourage the diffusion and
deployment of green technologies; and

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 Commit to end pervasive subsidies and other distortions that lead to excessive
energy consumption, pollution, and high greenhouse gas emissions, complemented
by measures (such as targeted, conditional cash transfers) to mitigate the adverse
social impacts.

Trade and Investment Integration in Asia.

 Renew efforts to complete the World Trade Organization (WTO) Doha round to
support liberalization of goods and services trade and investment;
 Rationalize and harmonize rules of origin (ROOs) and product standards, and
implement mutual recognition of the qualifications of service providers;
 Support trade integration via consolidation of bilateral and plurilateral agreements
into a region-wide agreement, in ways that are open, as non-discriminatory as
possible, and WTO-consistent;
 Promote infrastructure investment; and
 Address issues of food and energy security without jeopardizing free trade.

Financial Regulatory Reform in G20 Countries.

 Ensure that tighter standards, such as higher capital and liquidity requirements, do
not choke off the global recovery;
 Support the development of a global mechanism for managing volatile short-term
capital flows, and development of macroprudential surveillance and regulation at
the national and regional levels; and
 Establish an effective regulatory framework for macroprudential supervision and
regulation at the national and regional levels.

Regional Economic and Financial Cooperation.

 Enhance the Chiang Mai Initiative Multilateralization (CMIM) further to develop it
into a full-fledged Asian monetary fund;
 Establish a regional Asian financial stability dialogue that is consistent and coherent
with global institutions; and
 Consider further measures to enhance the deepening and integration of Asian
financial markets, especially local currency bond markets, to facilitate the recycling
of Asia’s high levels of savings to finance investment and consumption in the
region.

The IMF and the World Bank: Reform of Operations and Governance.
 Set a concrete target of a quota share, such as one third for Asia (compared with
just over 20% now) by 2016;
 Adjust the process for selecting the chairs of the executive board;
 Support selecting an Asian as the managing director of the International Monetary
Fund (IMF) in the near future; and
 Review the international financial architecture on issues such as measures to
manage short-term capital flows, and balance the adjustment process between
capital exporting and capital importing countries.

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 Policy Recommendations to
Secure Balanced and Sustainable Growth in Asia

Introduction
The recent financial crisis and global economic downturn did not originate in Asia, but
Asian financial markets and economies were severely affected, mainly via the export
channel, and also, in some cases, due to shortages of foreign exchange. Fortunately,
as a result of a combination of strong economic and financial fundamentals and
aggressive implementation of monetary and fiscal easing policies, Asian economies
are strongly recovering. It is no exaggeration to say that they are now leading the
global economic recovery at a time when the advanced economies, mainly the
United States (US) and Europe, still face uncertain prospects.

In March 2009 the Asian Policy Forum, with the support of the Asian Development
Bank Institute, published a document entitled “Recommendations of Policy
Responses to the Global Financial and Economic Crisis for East Asian Leaders.”
This document received wide recognition as an Asian-wide statement of not only
regional but also global significance. Much has happened over the past year and a
half, so that we believe it is appropriate to review these developments and update
our policy recommendations. In some cases, the previous recommendations were
adopted, such as those for aggressive monetary and fiscal stimulus, which clearly
contributed to the rapid and strong economic recovery in Asia. In other cases, such
as financial sector regulation and reform, the international agenda has been
dominated by the viewpoints of the US and Europe, and Asian economies need to
articulate and express strongly their concerns and views in this area. Regarding
regional cooperation, initiatives such as the multilateralization of the Chiang Mai
Initiative and the establishment of an ASEAN+3 Macroeconomic Research Office
(AMRO) have made some progress, but further work needs to be done. Trade
liberalization measures are progressing, but at a varied pace. Changes in other
areas—such as the need to reduce the global imbalance and to rebalance growth in
Asia to a new and sustainable pattern, characterized by reliance primarily on regional
and domestic demand, and with greater social inclusion and environmental
sustainability—have barely started.

In the meantime, new risks have emerged, most notably the sovereign debt crisis in
southern Europe, lingering worries about a double-dip recession in the advanced
economies, uncertainties about the appropriate timing of the withdrawal of monetary
and fiscal stimulus programs around the world, renewed short-term capital inflows in
emerging economies, currency appreciation pressures and “currency wars”. Now that
the near-term recovery targets have been achieved, Asian policymakers need to
focus on ways to make the recovery sustainable and enduring. This means a growth
pattern in Asia that is consistent with sustainable current account surpluses, relies
more on regional and domestic demand, leads to greater social inclusion, and is
environmentally sustainable.

The need for a strong, unified, and clear Asian voice is obvious. The success of
Asian recovery measures, together with continued weakness and fragility in the US
and Europe, has given Asia new prominence and authority in world forums. The rise
of the Group of Twenty (G20) as the premier forum for global economic policy
coordination has also given Asia an increased opportunity to play a more important
role for effecting change in the global economic and financial architecture.

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In addition to a stronger Asian voice in world forums, we believe that strengthening
and developing institutions for regional cooperation can make a significant
contribution to achieving these goals. These institutions include the ASEAN+3, the
East Asia Summit (EAS) and the Asia-Pacific Economic Cooperation (APEC)
processes. We support the development of the Chiang Mai Initiative
Multilateralization (CMIM), under the auspices of the ASEAN+3 finance ministers,
into a full-fledged Asian monetary fund. New regional institutions, such as an Asian
financial stability dialogue (AFSD), could play an important role in macroeconomic
and financial stabilization efforts in the future. Moves to integrate regional financial
markets, including more harmonized regulation and mutually recognized standards,
could facilitate the development of intraregional financing to enable the high savings
in the region to be recycled to finance attractive investment projects, which in turn
would reduce the regional current account surplus.

Asian leaders need to meet and enunciate an Asian program to achieve balanced
and sustainable growth. The articulation of such a program will boost confidence and
position the region as a leading center of the global recovery. This will require
intensifying the process of economic and financial cooperation in Asia. This report
presents our policy recommendations in the following areas: the role of Asian
regional bodies in global macroeconomic and financial management; policies for
reducing the global current account imbalance; policies for inclusive and green
growth; trade and investment integration in Asia; financial regulatory reform; regional
economic and financial cooperation; and reform of international financial institutions,
particularly the International Monetary Fund (IMF) and the World Bank.

I. The Role of Asian Regional Bodies in Global Macroeconomic

and Financial Management

Basic principles
G20 has emerged as the premier forum for global policy coordination. The fact that it
includes both advanced and emerging economies represents a major paradigm shift.
Asian members can make G20 more effective by bringing new ideas and viewpoints
to the table and contributing to a dynamic dialogue. Asian economies need to bridge
G20 with other intra-Asian and trans-regional policy forums in an effective way. Two
principles should guide participation of Asian economies in regional and global
forums:

First, Asian members of G20 should form a caucus to develop common positions on
some important issues, without constraining non-members to support particular
positions. They should be proactive rather than reactive. Holding the ASEAN,
ASEAN+3, and East Asia Summit (EAS) meetings, as well as the South Asian
Association for Regional Cooperation (SAARC) meeting, before the G20 meetings to
exchange information would be desirable in order to institutionalize communication
and information sharing between G20 members and non-members.

Second, Asian G20 members should be cautious about claiming to speak for the
region as a whole, but need to be aware of regional views. The G20 should use a
number of Asian institutions as delivery mechanisms and consultation vehicles when
appropriate. More generally, regional and trans-regional forums like ASEAN, APEC,
and the Asia Europe Meeting (ASEM) should engage more with the G20 process.

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The consultation process should be two-way. It is important to identify what additional
regional infrastructure would be needed to enhance this process. The ASEAN chair
can play a role in communicating to the G20 the views of ASEAN members that are
not members of G20. Regional multilateral development banks should also be invited
to the G20 process as they can both facilitate communication with non-member
developing economies and address issues of economic development, inclusion, and
green growth. These banks may also support fiscal stimulus efforts in economies
where local finances are constrained.

G20 issues
Asian perspective: The center of global economic gravity is continuing to shift toward
Asia, both in terms of economic size and growth potential. This should be reflected
both in the voice of Asian members in the discussion and the perspective from which
issues are framed. Asian members should increasingly become agenda and rule
setters, not just followers. From the standpoint of Asian (and all) emerging
economies, the following issues need to be given due attention:
 appropriate timing and pace of exits from macroeconomic stimulus policies in light
of short-term capital inflows and currency appreciation pressures;
 the need to avoid competitive currency devaluations (“currency wars”), while
facilitating currency adjustments consistent with macroeconomic and financial-
sector stability;
 implementation of financial safety nets (reliable access to hard currency liquidity),
especially to reduce the risks of “sudden stops” or capital flow “reversals”; and
 reforms of international financial institutions (IFIs).
Policy coordination: In the current economic environment of diverging economic
performance, global policy coordination is becoming more difficult among the G20
members. The formula of “credible, properly phased and growth-friendly plans to
deliver fiscal sustainability” (Toronto G20 Summit) represents an uneasy compromise
between European and US views, and it remains unclear how to implement this.
Asian leaders need to consider how Asia can contribute to achieving a sustainable
global economic recovery when growth in advanced economies remains weak. Asian
leaders need a more substantial dialogue regarding the US proposal for a framework
to achieve strong, sustainable, and balanced growth. There is a case for thinking that
current-account deficit countries should tighten fiscal policy relatively early while
surplus countries should pursue structural reforms to support a private-sector-led
economic expansion. However, any fiscal tightening should be pursued cautiously so
as not to risk jeopardizing the global recovery. The risks of a double-dip recession
and associated policy responses need to be considered. Asian leaders need to
ensure that G20 has the capacity to carry out fiscal and monetary policy coordination,
in cases where there is a decoupling of growth prospects in advanced and emerging
economies and policy divergence between the two. Lack of policy coordination also
has potential implications for exchange rates, which implies a greater need for a
policy dialogue to monitor and respond to market conditions.
Institutionalization of G20: There should not be a premature institutionalization of
G20, such as establishing a permanent secretariat. G20 should develop slowly as a
global governance body by building on consensus, gaining authority and legitimacy,
and achieving positive results. Informal discussion groups of all kinds, including
G7/G8 and BRICs, are entirely legitimate, but they should aim to strengthen global
governance by providing broad-based solutions to the problems the global economy
is facing.

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Ultimately, G20 may have to engage with the United Nations in order to be inclusive
and secure legitimacy for any actions which claim a basis in international
agreements. But much can be gained from relying on consensus rather than legal
status. The objective should not be discussion for its own sake but agreement and
implementation. This will often require interaction with regional forums and regional
multilateral development banks in the G20 process.
Expansion of the East Asia Summit
We welcome the initiative of ASEAN to invite the US and Russia as part of the East
Asia Summit group. This extended group should primarily address wider issues such
as the environment, energy, food, and security.

II. Policies for Reducing the Global Current Account Imbalance

Basic principles
Resolving the global current account imbalance is desirable to support global
economic recovery and sustainable growth. In view of the uncertain growth prospects
of the US and Europe, Asia needs to take a leading role to fill the global demand gap.
The adjustment process has to be equitable—there should be a focus on what both
current-account deficit and surplus economies need to do.
A distinction should be made between issues related to current account surpluses
and foreign exchange reserve accumulation. The former reflects imbalances between
production and spending, whose solution would require increased spending relative
to production, along with corresponding shifts in the production mix, with an
increased focus on services and non-tradables. A current account imbalance also
reflects an imbalance between savings and investment, and its narrowing would
require an increase in investment relative to savings. Foreign exchange reserve
accumulation has been driven partly by the desire for currency stability at
undervalued exchange rates, but the major driver has probably been the motive of
self-insurance against crises. These efforts have tended to exacerbate the global
imbalance. Therefore, Asian economies need to reconsider the pros and cons of
currency stabilization policy, particularly from national and global macroeconomic
perspectives. There is also a need to strengthen global and regional financial safety
nets and crisis management mechanisms to reduce the need for self-insurance.
Well-functioning financial markets which facilitate management of currency risk and
the evolution of a range of international reserve currencies are needed as well.
We are very concerned about the risks of growing short-term capital inflows and
currency appreciation pressure in emerging economies, and competitive currency
devaluations (“currency wars”). These could jeopardize the global economic
recovery, disrupt international trade, and run contrary to orderly adjustment of the
global current account imbalance. G20 nations need to oppose unilateral devaluation
moves and support currency stability, while allowing for adjustments where needed.
Export-led growth itself should not be rejected as it enhances dynamic efficiency of
the economy; the key point is to liberalize import markets and diversify export
products and destinations. Excessively large trade surpluses can be reduced by
opening up import markets and promoting domestic demand drivers.

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Structural approach to reducing current account imbalances
Correcting current account imbalances requires Asian economies to develop a new
growth strategy based on regional and domestic growth. This requires structural
reforms to be made such as reducing factor and resource market distortions,
stimulating household consumption, investing in education, promoting the integration
of Asian markets for goods and services, and deepening integration of financial
markets to mobilize Asian savings to fund investment needs in the region. However,
we are very cautious about adopting numerical targets for current account balances.
Greater focus on structural reforms: Asian leaders should seek to make a positive
contribution to the international debate on imbalances by describing how Asia is
addressing this rebalancing issue by emphasizing structural reforms, rather than
simply focusing on the People’s Republic of China (PRC) yuan-US dollar exchange
rate. The role of the PRC is important, but the global imbalance is not simply a
bilateral issue between the US and the PRC. Also, it should be recognized that the
large size of the PRC trade surplus partly reflects its position at the end of the Asian
supply chain.
The approach on structural reforms should focus on removing biases that tend to
create large net exports, including export subsidies, import restrictions, and other
factor price distortions that contribute to large corporate savings. The global economy
will benefit as the PRC removes these distortions by increasing the share of wages in
value-added, by allowing energy and resource prices to rise to levels consistent with
international prices, or by promoting investment by small- and medium-sized
enterprises (SMEs). Measures to facilitate household consumption, such as stronger
social safety nets and more inclusive provision of financial services, would be
desirable. Liberalization of regional trade and investment in goods and services can
contribute to this goal as well.
Steps need to be taken to expand the effective size of final regional demand, taking
advantage of such developments as the rise of the Asian middle class. These steps
would include measures to liberalize trade, investment, services, and factor flows
within the region and to improve the infrastructure for trade. Along with this,
development of financial markets in Asia can reduce both the incentive to invest
Asian savings in the advanced economies and the exposure to volatile short-term
capital flows.
An important principle is that real exchange rate appreciation can be achieved either
by nominal foreign exchange rate appreciation or by increases in prices and wages
to facilitate rebalancing. Structural reforms that raise nominal wage levels in Asia can
play an important role in this. However, given that rapid wage increases can be
translated into high consumer price inflation, prudent macroeconomic management
would require some adjustment of nominal exchange rates.
US adjustments: Asian economies may also want to advise the US to raise
productivity to stimulate exports, rather than through US dollar nominal depreciation,
to pursue gradual fiscal consolidation, and to reduce excessive spending, including
consumption of fossil fuels.
Financial safety nets to reduce the need for foreign reserve accumulation
Asian surplus economies’ export-led strategies, which have been accompanied by
large-scale reserve accumulation, need to be reconsidered. Asia needs stronger
financial safety nets to reduce the need to accumulate foreign exchange reserves,
both at the global and regional levels. The CMIM needs to be strengthened further,
so that the IMF linkage to lending conditionality can eventually be removed. The
current reliance on the US dollar as a reserve currency may have contributed to
instability because of the need for Asian countries to increase their holdings of US

9
dollar foreign exchange reserves which help to finance the US current account
deficit. There is a need to lessen such dependence. Asian economies should
promote greater use of Asian currencies, including internationalization of the PRC
yuan.

III. Policies for Inclusive and Green Growth

Basic principles
Asian economies should commit to achieving more equitable and sustainable growth,
i.e., inclusive and green growth. Even during a period of fiscal consolidation,
advanced economies should commit to maintaining levels of official development
assistance (ODA) and other official flows to help promote inclusive and green growth
in developing countries. In particular, there is a key role for long-term ODA
investment in strengthening institutions and building capacity in national government
agencies, the private sector, and policy research institutions in developing countries.
Inclusive growth
Asian economies need to create opportunities for individuals to share in the fruits of
economic growth within an economy, and for individual economies to share in the
fruits of growth in the global economy. Support for agriculture, SMEs, and micro
enterprises is an important aspect of this. The key is to facilitate the process of
economic change by making it feasible for people to cope with the effects of those
changes. Sharing in global economic growth is best promoted by economic and
technical cooperation driven by mutual self-interest and external assistance.
Employment and productivity: Employment and productivity growth are the chief
vehicles for raising incomes and economic participation. Increasing the share of labor
income in GDP can make a major contribution in some countries to improving
inclusiveness and raising consumer spending. The negative impacts of the global
financial crisis on employment need to be addressed. Public investment spending
should aim toward maximizing job creation, especially for the poor, including in
agriculture and SMEs, in a way that is consistent with green growth objectives. Labor
market reforms can contribute to increasing employment growth during economic
upturns. Improvements of labor rights and corporate governance can contribute to
increasing the share of labor in GDP.
Social protection and other public expenditures: Levels of social protection in Asia
generally remain low by international standards, contributing to social vulnerabilities
among the poor and low-income people and a high precautionary demand for
savings. Improving the coverage and quality of social protection can reduce such
vulnerabilities and, at the same time, support increased consumer spending by
reducing this precautionary demand. Improved quality and affordability of public
services can also benefit the poor a great deal. Social protection programs should be
well-designed so that they do not unduly add fiscal burdens or change incentives in
ways that may undermine social objectives.
Infrastructure investment: Increased infrastructure investment for rural sector
development and urban development, such as in transport, water, and sanitation
systems, can promote economic inclusion as well. Asian economies should support
development of a regional infrastructure fund to help strengthen cross-border
connectivity, especially in countries that are fiscally constrained.

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Support for SMEs and micro enterprises: Support of SMEs and micro enterprises is
important, in view of their important roles in economic activity and employment in
Asia. SME support measures can make an important contribution to creating and
stabilizing employment. Policies to encourage clustering and cooperation with large
firms need to be pursued, since these are probably the most important drivers of
SME vitality. Financial inclusion, such as establishing SME credit databases, can
make an important contribution to increasing the transparency and productivity of
financial services received by SMEs. Expanding the access of individuals to financial
services via innovations in microfinance is also a key aspect of inclusion.
Green growth
We support measures to encourage cleaner and greener economic development in
various sectors, such as manufacturing, transport, and agriculture, and in urban
areas. “Green” growth—made possible through a growth agenda that internalizes the
environmental costs in resource use—would require regional coordination because of
spillover effects of policies. Coordination should include commitments to end
pervasive subsidies and other distortions—for both final consumption and production
activities—that lead to excessive consumption of energy and materials, cause
serious environmental contamination, and accelerate greenhouse gas emissions.
Policy measures: The calls for a “green new deal” as part of large-scale public sector
support have generally not yet been heeded. As the largest consumer, governments
should take the lead in purchasing green goods and services. We support the use of
market-based mechanisms to enable firms and households to internalize social
environmental costs and to encourage diffusion and deployment of green
technologies at a scale required. Tax incentives can be given for the production and
consumption of green products and services. There are opportunities for innovation
and experimentation, such as the use of cap and trade mechanisms and carbon
taxes in economies that are ready for them. Also, environmentally harmful energy
subsidies need to be reduced, after careful introduction of targeted, conditional cash
transfer programs to minimize adverse impacts on the socially vulnerable where
needed.
Technology transfer: We support measures to encourage renewable energy
development and green innovation as one of the engines for future growth. Research
and development (R&D) support through public and private financing and facilitation
of technology transfers to maximize diffusion of available and emerging new
technologies should be encouraged, particularly those that are employment-
intensive. Protection of intellectual property rights (IPR) plays an important role in
this, and more innovative thinking is required to reduce costs where possible, such
as Japan’s program of “green aid.” There is a need to distinguish between publicly
funded non-commercial and privately funded commercial technologies, where
treatment of IPR is different. More generally, there is a need for promoting
international consensus on balancing incentives to innovation against permitting
access to knowledge.
Liberalizing trade in environmental goods and services: There is a need to promote
the rapid diffusion of eco-friendly technologies across sectors and economies. This
could proceed in a manner similar to the Information Technology Agreement.

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IV. Trade and Investment Integration in Asia

Basic principles
Asian leaders should support the process of trade and investment integration,
keeping in mind that the ultimate goal is increased integration with, and openness in,
the global economy to promote global growth and development. Asia offers a positive
example of, and should be a force for, globalization and liberalization, and should be
proud that it has not resorted to protectionist measures. Asia needs to continue to
support liberalization of trade in goods and services, and investment globally.
Regional and interregional institutions can also play an important role in facilitating
regional investment and connectivity.
We support basing the process of Asian trade integration on the following principles:
moving from the easy to the difficult; moving step-by-step; and taking a multi-pronged
approach with global links. Related key goals include liberalizing trade in goods and
services through rationalizing and harmonizing rules of origin (ROOs), product
standards, and mutual recognition of the qualifications of service providers.
Expanded investment in hard and soft infrastructure for trade can make an important
contribution to promoting increased intra-regional trade and supporting secure,
balanced, and sustainable growth.
WTO-related issues
There should be renewed efforts to complete the World Trade Organization (WTO)
Doha round. Murky protectionism, including anti-dumping measures and others that
are WTO-compliant, is becoming an increasing problem. Any such protectionist
tendencies need to be resisted. We support the continued use of WTO dispute
resolution mechanisms in the absence of positive outcomes from negotiating rounds.
Role of bilateral and plurilateral trade agreements
In addition to the Doha round, Asian leaders should continue to support trade
integration via consolidation of overlapping bilateral and plurilateral agreements into
a region-wide agreement, and ensure that these agreements be as open and non-
discriminatory as possible as well as WTO-consistent. The keys to achieving this are
liberal accession clauses and processes. However, the process needs to be pursued
cautiously, and in a way that is not perceived negatively by the rest of the world. In
the longer-term, key milestones in terms of progress toward achievement of Asian
trade integration include: implementing the ASEAN Economic Community (AEC),
achieving a free trade agreement (FTA) among the PRC, Republic of Korea, and
Japan (CJK FTA), and finally connecting the ASEAN+1 FTAs with the CJK FTA and
with India, Australia and other economies to forge a region-wide single FTA.
Progress toward the AEC has so far been uneven. The adoption of the “scorecard”
approach may speed up implementing the commitments by individual member
countries. A CJK agreement is a major missing link in the current regional trade
architecture, but progress needs to be supported by increased trust among these
countries. Along with these goals, rationalizing, coordinating, and harmonizing ROOs
and liberalizing services with mutual recognition need to receive priority.
The principle of “moving from the easy to the difficult” suggests that the first priority
should be to achieve a CJK FTA, followed by an East Asia FTA (EAFTA) based on
the ASEAN+3 countries, and then, a Comprehensive Economic Partnership in East
Asia (CEPEA) including India, Australia and New Zealand. The principle of “taking a
multi-pronged approach with global links” suggests that agreements such as the
Trans-Pacific Strategic Economic Partnership (TPP) and FTAs with the European

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Union (EU) are appropriate for increasing links with the US and Europe.
Nevertheless, flexibility is needed, and a number of differing approaches should be
allowed to progress simultaneously.
Asian leaders in G20 should promote international rules and procedures that are
consistent with Asian economic integration and the development of Asian supply
chains. The key is to understand to what extent regional agreements can be made
consistent with global trade liberalization, and to review WTO rules on such
agreements from this perspective.
Services liberalization
Asian leaders should advocate and sponsor an international thrust toward
liberalization of trade in services. However, the traditional mode of trade negotiations
on goods is not well suited for services. APEC’s Group on Services persuaded all
APEC economies to participate in the current WTO negotiations on services, albeit at
a low level in some cases. The conventional offer and acceptance modality which
worked for goods tariffs is not working well in services, and a new initiative is needed,
perhaps putting the onus on economies to justify their refusal of requests from
trading partners. It may be possible to make further progress via bilateral and
plurilateral agreements with mutual recognition. Also, further progress is needed in
the areas of right of establishment (mode 3) and labor mobility (mode 4) to realize the
full benefit of services liberalization. Also competition policy, network effects, and
network compatibility issues are important.
Resource and food security
Asian leaders may consider establishing an Asia-Pacific Energy Community, which
champions not only energy security but also free trade of energy products.
Development of food reserves is still very important, and incentives for development
are still needed in the near-term. Also, they may consider developing an East Asian
Agricultural Policy—including pooling of food reserves. Export moratoriums on
agricultural products, in response to high prices, should be avoided.

V. Financial Regulatory Reform in G20 Countries

Basic principles
The financial sector should serve the interests of the real sector, rather than being
focused on simply generating profits from financial trading and other activities.
We welcome recent progress in creating stronger supervisory frameworks in the US
and Europe—where the global financial crisis originated—including the focus on
capital adequacy and liquidity standards, leverage ratio limits, regulation and
supervision of systemically important financial institutions (SIFIs), monitoring of
hedge funds, transparency of over-the-counter (OTC) derivatives, credit rating
agencies, and compensation—which are important for their financial systems. We
hope that their financial systems will be restored to health as soon as possible while
avoiding problems associated with “too-big-to-fail” or “too-connected-to-fail”. We also
welcome the moves to harmonize global accounting standards.
However, it is important to ensure that tighter standards do not choke off the global
recovery or that a “one-size-fits-all” approach does not put excessive burdens on
Asian financial institutions. There must be scope for flexibility in the application of

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rules, and a balance between financial stability and financial development—including
the capacity to innovate—must also be struck.
We support developing a global mechanism for managing volatile capital flows, and
developing macroprudential surveillance and regulation at the national and regional
levels. Financial reform needs to be accompanied by increased capacity building in
the region.

Asian voice and interests

There needs to be an Asian voice on financial reform and regulation rather than
allowing the debate on issues to be dominated by a perceived choice between
American and European approaches. A “one-size-fits-all” approach is inappropriate
due to differences in financial systems, stages of development and banking industry
practices, and may lead to excessive burdens in areas such as capital and liquidity
adequacy requirements and leverage ratios. In addition, there is a risk of spillover
effects from developed country regulatory changes and low-interest-rate policies that
lead to migration of risky financial activities to Asia that could affect regional financial
stability. Asian leaders should consider sponsoring their own research on the impacts
of the new regulations on Asian financial institutions and markets.
Rule-making process: The issue is one of appropriate regulation rather than more
regulation. This includes more technical debates, which may involve the Bank for
International Settlements (BIS) and the Financial Stability Board (FSB) more than the
G20. Revisions to Basel rules must not be allowed to handicap Asian banks. For
example, the last G20 communiqué failed to resolve the issue of requiring derivatives
to be standardized and traded on exchanges. While there is little interest in this issue
in Asia now, the American approach of using an exchange for standardized
derivative contracts while allowing nonstandard contracts among informed
participants is preferable to the European approach. There are many unresolved
issues in areas such as regulation of SIFIs, cross-border supervision, and the global
financial safety net, where the implications for Asian economies need to be
considered.
Management of capital flows: Volatile capital flows played a major role in both the
Asian crisis of 1997–1998 and the global financial crisis. Asian leaders need to put
their imprint on a new international financial architecture for constructively managing
international capital flows, especially short-term flows, which are most volatile.
Macroprudential supervision and regulation: Asian economies should establish an
effective regulatory framework for macroprudential supervision and regulation at the
national and regional levels. This is a very important lesson from the global financial
crisis. They also need to encourage strengthening the objective of financial stability in
the mandates of central banks.

VI. Regional Economic and Financial Cooperation

Basic principles
The CMIM is a key regional liquidity support framework, and needs to be
strengthened further to become an Asian monetary fund to achieve full effectiveness.
There is also a need to establish an AFSD that is consistent and coherent with global
institutions concerned with financial stability. Asian progress in this area can provide

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a model for the rest of the world. Further measures are needed to promote financial
market deepening in the region and support regional investment. Exchange rate
policy coordination should be encouraged. Mechanisms for managing capital flows at
the regional level need to be implemented as well.
Chiang Mai Initiative Multilateralization
We welcome recent developments to implement and enhance the CMIM, including
agreement on contributions, borrowing limits, voting weights, and the establishment
of the AMRO. The enhancement process should continue so that the CMIM may
develop into a full-fledged Asian monetary fund. The core problems are conditionality
and repayment; potential creditor countries are reluctant to lend reserves without
assurance they will be paid back, and repayment can be confidently expected only
when loans come packaged with conditions, but governments hesitate to demand
conditions of their neighbors. Potential debtor countries do not wish to borrow if the
borrowing is linked with an IMF program—which is the case when more than 20% of
the borrowing limit is to be drawn—given the stigma associated with such programs.
Also, funding is still relatively small.
Needed enhancements of the CMIM include: size of funding; development of
surveillance capacity; eventual elimination of IMF linkage; and implementation of a
flexible precautionary facility in addition to a crisis support facility. The AMRO’s role
and mandate should be clarified, matched with sufficient resources, and expanded to
that of a full secretariat of the finance ministers’ process. Because the credibility and
authority of the AMRO’s surveillance activity are key, it should become an institution
with transparency, objectivity, and high standards of professionalism, and should be
adequately financed. A flexible precautionary (non-crisis) facility should be
established. The extent to which members are committed to respond to AMRO
recommendations needs to be clarified, and conditionality also needs to be decided
on. The relationship of the CMIM with the IMF will need to be redefined once formal
linkage is ended.
The operations of the AMRO and CMIM may also be made more effective by
creating a framework where ASEAN+3 finance ministers and central bank governors
can work with each other, or at least by developing relationships with the existing
central bank governors process in the region (EMEAP). Such moves would
strengthen the regional framework for macroeconomic stability and consultation.
Fiscal funding mechanism: Asian leaders should also explore the possibility of
establishing a fiscal funding mechanism to support fiscal stimulus measures of
member countries, or infrastructure investment, when local financing conditions are
constrained due to financial turbulence.
Asian financial stability dialogue
Asian leaders should establish an AFSD, including finance ministries, central banks
and financial regulatory agencies, to formulate regional views on appropriate
principles, regulations, and practical mechanisms for the financial sector. Such a
regional institution would establish useful links between international institutions such
as the BIS and the FSB with national financial stability entities. Regional institutional
developments that generate global public goods such as financial stability can
contribute to the evolution of appropriate global financial architecture.
Financial market deepening and integration
Asian leaders need to consider further measures to enhance the deepening and
integration of Asian financial markets to facilitate the recycling of Asia’s high savings
to finance investment in the region. These measures include: establishing a regional
mechanism for supporting infrastructure and other fiscal investments; further

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expanding the Asian Bond Funds programs, perhaps including corporate bonds;
continuing to develop and implement the Asian Bond Markets Initiative, including
harmonizing of bond market regulations, infrastructure, and tax regimes;
implementing the Credit Guarantee and Investment Facility; and creating an Asia-
wide clearing system.

VII. The IMF and the World Bank: Reform of Operations and
Governance

Basic principles
Three areas need to be addressed: increased representation of Asian and other
emerging economy members, including quotas and chairs of the executive board;
reform of lending conditionality; and reform of governance. An increased Asian voice
commensurate with the rising importance of Asia in the world economy can change
IMF governance in a positive way, and this is necessary to eliminate the IMF stigma
in Asia. We support the efforts of the IMF Asia-Pacific Regional Advisory Group to
propose reforms of the IMF, and Asian leaders should consider sponsoring a working
group to propose additional reforms of the IMF and the World Bank to increase Asia’s
intellectual contribution to the debate on these issues. The IMF needs to improve its
communication and cooperation with regional institutions to develop a more inclusive
process. There needs to be a review of the international financial architecture on
issues such as measures to manage volatile short-term capital flows, and how to
balance adjustments between capital exporting and capital importing countries.
Asian representation and governance reform
Adjustments of voting shares and the process of selection of organization heads
need to be pursued. The process for selecting the chairs of the executive board also
needs to be adjusted. Asian leaders should propose an immediate increase of IMF
voting rights of 6 percentage points for emerging markets, and should set a concrete
target of a quota share, such as 33% for Asia (compared with just over 20% now) by
2016. We support selecting an Asian as the managing director of the IMF in the near
future.
The governance structures and objectives of the IMF and the World Bank need to be
reviewed more thoroughly. The structures created in the 1940s—which include both
political and corporate elements—should give way to a modern distinction between
governance and management. The board of executive directors should act more like
a corporate board and not be involved in day-to-day operations. However, there may
be scope for greater inputs from ministers. Management should become more
independent from the political process.
Operations—Lending and conditionality
The introduction of enhanced and/or new instruments by the IMF is welcome,
including the enhanced Flexible Credit Line and a new Precautionary Credit Line.
The size of IMF funding needs to be reviewed, as well as its relationship to other
institutions such as the CMIM. Also, the IMF capacity on the ground needs to be
reviewed. In light of the experience of the 2007–2009 global financial crisis, the IMF
also needs to review its recommendations regarding management of short-term
capital flows and the needed policies of current-account deficit and surplus countries
in adjusting current account imbalances.

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Fiscal support measures
The IMF and the World Bank may want to “bail in” sovereign funds to support
infrastructure investment and sovereign lending to crisis-hit countries. The World
Bank needs to focus on providing global public goods, such as investments related to
mitigating climate change and communicable diseases, contributing to achievement
of the Millennium Development Goals, global food and energy security, and reducing
poverty.

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